China Has Lost Its Appetite for US Debt - Where Will It Go?

For over a decade, the United States has been very fortunate. Our government has been able to export every bit of inflation they have created to foreign governments like China and Japan, who were eager buyers of our debt. This is extremely lucky, because our government has been on an unprecedented spending spree, what with bailouts and TARP and various giveaways to soften the blow of the various bubbles bursting. There is no doubt we have been living well above our means. We have a budget deficit approaching half a trillion dollars every year. That is the difference between the government’s tax revenue and what the government spends, and it is outrageous.

Uncle Sam turns that deficit into more debt. We can do that because our reserve currency status means other countries’ central banks are (or have been) happy to buy and hold a good sized portion of these dollars as their savings. It is akin to giving a credit card with no limit to an especially irresponsible teenager.

This is not a situation that can go on forever, obviously.

But now China is in trouble. Their bubbled economy, that has floated our debts for so long, seems to be careening into a deep recession. Their market has seen some calamitous tumbles of late and according to Forbes, they have 15% or more left to fall. They are no longer in a position to buy dollars. Instead, they have begun to sell them. This spells enormous trouble for us in terms of government spending and inflation.

This chart tells the story of our decreasing ability to export this inflation. You can see how we were buffered by foreign governments and banks, China being the most significant, through the QE years. Those red lines beginning at year 2015 signal a paradigm shift. The world is now selling the dollar at unprecedented rates, which brings up a troubling question:

Where will that inflation now go?

The answer? It’s going to stay right here in the United States and eventually settle into our CPI.

Recent core CPI numbers, as manipulated as they are, are starting to creep up. Cheap gas seems to be balancing out higher medical costs, holding back an even higher core CPI, but once energy costs begin to creep back up, hold on to your hat! The inflation resulting from more government debt has nowhere else to go. And in fact, for NOW, domestic buyers of treasuries have picked up China’s slack. Hedge funds and all manner of US investors have stepped up demand for US debt. How deep that appetite is remains to be seen, but when we reach the end of it, then what?

There is no will in Congress or the Administration to decrease spending in any way. It would be politically impossible right now to increase taxes enough to pay for the overspending, but they will almost certainly try. Most likely, they will take it out of us by inflating our dollars and we will pay for it through rising prices.

Expect to see the price of gold go up along with the price of everything else.

That is the beauty of gold. It tends to keep pace with the price of other things while the value of dollars sinks. That is how it maintains its purchasing power over time, where other forms of savings can rapidly degrade and get inflated away.

We are at an important precipice right now where the price of gold and inflation forces meet. It won’t be long before all those pressures collide and prices go up. Prices for gold today are still very low, all things considered. It’s a great time to buy.

Protect yourself and your family’s future with gold and silver. They are the backstop against the monetary craziness that is being unleashed.

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